For Indians living abroad, India remains important financially, emotionally, and culturally. While they may earn and build their lives overseas, their roots and family often remain connected with their homeland. This connection is a major reason why Non-Resident Indians (NRIs) continue to explore opportunities for NRI investment in India. The choices are wide-ranging, but to get the best out of them, understanding the rules of taxation and compliance is essential.
Why NRIs Choose to Invest in India
There are many reasons why NRIs continue to invest in Indian markets.
-
Emotional connections: Many NRIs have strong relationships with family members in India. Investing here provides them with a sense of continuity and belonging, as well as helping to finance loved ones.
-
Expanding economy: India’s robust economic growth makes it a popular market for long-term investment.
-
Varied choices: Ranging from property and fixed deposits to life insurance products and mutual funds, there are plenty of investment plans available for NRIs.
-
Regulatory framework: The rules may seem extensive, but India has clear regulations for foreign investments that build trust.
An NRI living in Canada might prefer equity investments to benefit from India’s growth story. Such choices are practical and emotional, making it crucial to grasp the tax and compliance environment.
NRI taxability of investments
NRIs are taxed under the Income Tax Act, 1961 and have a different tax law from residents.
Here are some relevant points:
Indian income is taxable. NRIs earning India-sourced income, i.e. rent interest, capital gain or dividend, the India-sourced income is taxable. Income sourced outside India is not taxed in India. Double Taxation Avoidance Agreement (DTAA). If an NRI is taxed on the same income, India has DTAA with several countries to prohibit this. The agreement is set up in a favourable manner, whereby it helps NRIs if the income has been taxed overseas.
-
Capital gains: Capital gains are treated as per the type of asset and holding period.
If an NRI sells shares in less than a year, the profit is regarded as short-term capital gain and is taxed at 15 per cent.
When shares are kept for over a year, the gain is regarded as long-term and taxed at 10 per cent over a threshold. Gains on real estate are taxed at 20 per cent if the property has been kept for over two years.
-
Tax Deduction at Source (TDS): In most cases of payments to an NRI, TDS is deducted at the time of crediting the funds. Rental payments to an NRI landlord will have TDS deduction that needs to be paid to the government. This is where the rules really come into play, as NRIs need to plan their investments because there are different tax rates for different asset classes.
Essential Regulations and Framework
It is vital for NRIs to be aware of the provisions under the Foreign Exchange Management Act (FEMA), prior to making any investment, as they are put in place to ensure proper governance of foreign investment.
Some of the major provisions are;
-
NRE and NRO accounts: NRIs should also have one of the following accounts to invest in India, a Non-Resident External (NRE) account or Non-Resident Ordinary (NRO) account. An NRE account is a repatriable account, and you can repatriate funds. An NRO account is mainly for income generated in India.
-
Investment avenues: Some investments are prohibited (e.g chit funds or agricultural property). NRIs can invest freely in shares, stock mutual funds, deposits, and life insurance policies.
-
Repatriation regulations: Dividends and maturity proceeds can generally be repatriated overseas, subject to compliance with documentation norms.
This structure brings order and stability for the investor, with transparency maintained for cross-border transactions.
Compliance Requirements for NRIs
NRIs are required to adhere to specific compliance regulations in order to prevent fines and keep their investments valid. They are:
-
PAN card mandatory: A Permanent Account Number (PAN) card is compulsory for investing in most financial instruments, such as mutual funds and real estate.
-
KYC compliance: Know Your Customer guidelines require proof of identity and address. Many financial institutions also ask for proof of an overseas address and passport details.
-
Filing income tax returns: If an NRI has taxable income in India, he or she has to file an income tax return. This is especially important if the TDS deducted is more than the actual tax owed, as refunds are only available by filing a return.
-
Reporting foreign assets: In certain situations, NRIs who become residents again later have to report their foreign assets.
Default can bring about penalties or legal actions. For instance, failure to deduct TDS on rent paid to an NRI landlord can bring about fines for the tenant. Likewise, not filing returns when due may subject the taxpayer to notices and penalties from the tax department.
Popular Investment Options for NRIs
NRIs enjoy a few investment options in India. Each of them has its own tax implications, advantages, and risks.
-
Fixed deposits: Indian banks provide both NRE and NRO fixed deposits. Interest from NRE deposits is exempted, whereas interest earned on NRO deposits is taxable.
-
Mutual funds: NRIs can invest in debt and equity mutual funds. Although the returns can be enticing, capital gains tax will be levied based on the period of holding.
-
Real estate: Property purchase in India is still a favourite, particularly for those who are likely to return. However, there is a tax on rental income and capital gains.
-
Savings plans and life insurance: These products are popular because they provide both protection and investment. Companies offer savings-cum-protection products for resident and non-resident investors. Such products may have features such as premium refund, critical illness cover, and fund switching, depending on the product.